Is Greece-zuela a possibility?

Greece
That’s how you write “down with Merkel” in Greek

Greece has defaulted on one of its many liabilities to its creditors by missing a €1.5 billion  of its debt to the IMF. The Greek economy has already taken quite a toll, falling into depression. Greece’s economy has contracted by a quarter since the start of the crisis, and its unemployment rate is sitting over 25%.

You may be wondering why we should care.

Europe is a long ways away. Venezuela and Greece are far from intertwined, in either trade or in finance. And while both countries have many differences to point out, but the truth of the matter is that the depression facing the Greeks right now may well be a testament of our near future.

Both of these countries are struggling to make ends meet with their creditors. Greece lacks oil, its own currency, and perhaps a credible commitment to restore its way to fiscal sustainability. Venezuela has plenty of oil, a not-so “strong” Bolivar and an incompetent Government (to say the least.)

Yet Greece already defaulted on its debt, and the troika, (that is the ECB, the IMF and the European Commission) became Greece’s main creditors in order to contain a systemic risk of contagion within the Eurozone, and also to put Greece on the chopping boards by introducing austerity measures and restoring its public finances in exchange for bailout funds.

Whatever happens in Greece, it’s worth pondering whether Venezuela can default on its debt or not.

Most investment banks abroad believe that Venezuela will pay its liabilities (both PDVSA’s and the Republic’s) for the rest of 2015. Next year, however, will be a different story.

According to JP Morgan, Venezuela has a debt stock of around $140 billion (others think the figure is almost double that amount). PDVSA plus the Republic would have to transfer to their creditors around $6.3 billion in the next 2 quarters of 2015, and some $10 billion during 2016.

Greece’s debt-to-GDP ratio is at 190%, whilst Venezuela’s is just at 64,2% at an average exchange rate of 35Bsf per USD. (Apply the Simadi rate and you’re much closer to a Greek tragedy.)

Take into account that FX Reserves, according to the BCV, have plummeted from almost $29 billion five years ago, to 16.5 billion currently, and this implies very little wiggle room for steering the economy out of default. And in the context of falling oil prices, the alarms are ringing.

In fact, Venezuela has engaged in default before. As a matter of fact, it has done so 10 times (Latin America’s leader) according to the data by Reinhart & Rogoff. Bear in mind that the term default applies to both failing to meet payment of a debt as well as any restructuring of such liability. Also, they claim that as default ensues, a period of low to no growth for some time is a side effect.

So will we ever become a Greek tragedy?

The short answer might be yes, quite possibly. But unlike Greece, Venezuela is on its own for sorting its financial house in order. We don’t have the troika to bail us out (maybe the Chinese or Russians), nor do we have an IMF mission in the country – they haven’t visited since 2007. Also, most of our debt is held by private investors, and not public institutions such as the case for Greece. The Greeks just imposed capital controls…we did that twelve years ago, only making them more draconian as time flies by.

Many similarities and some divergence between these two nations, but it seems that heading into default-territory is becoming more of a fact than a likelihood. Should that happen, Greece’s crisis would look small compare to ours.

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